Lesson 42

4. Financial or Money Management

It is critical to understand how to make the most money possible from your good trades once you’ve put risk management measures in place.

All retail forex traders face this challenge. Although trading losses are expected, few traders advance beyond breaking even because they lack the necessary money management techniques to maximize winning trades.

We would look at different money management techniques, their benefits and drawbacks, and how to apply the one that works best for you to take your trading to the next level.

The following are the various money management techniques:

• Fixed number of lots
• Fixed percentage
• Fixed ratio

Lot sizes that are fixed.

This is the most basic method of money management for a trader. This method is simple to use and is best suited for beginners who are still learning the fundamentals of forex trading. The way fixed lot money management works is that you, as the trader, decide to risk a certain amount of money on every trade, regardless of the outcome.

PROS or ADVANTAGES:

• It is very intuitive and straightforward to use – for example, if you trade ten times and risk only $5 per trade, you can lose/make a maximum of $50, so you can get a quick overview of your money management without having to do any math.

DISADVANTAGES/CONS

• You miss out on higher returns as your account grows, and you risk too much during a period of drawdown – For example, let us say you risk/make $20 per trade on a $1000 account, resulting in a 1:1 risk-reward ratio. This means that on a $1000 investment, you can gain or lose 2% per trade.
• You then went on a winning streak of ten trades in a row, making a $200 profit. Your account balance is now $1200, but you are only making $20, or 1.6 percent of your total balance. As a result, you are not earning as much as you could be.
• The same principle applies to a losing streak. If you lose ten trades in a row, you will lose $200, resulting in an account balance of $800. If you use a fixed lot and risk $20, you are now putting 2.5 percent of your account at risk. This is now greater than the initial risk when your account was valued at $1,000.

As a result, fixed lot money management has two sides. To avoid falling into this trap, use the fixed percentage money management technique.